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5 High-Yield Dividend Stocks to Watch

It's important for investors to develop a shopping list of potential ideas so that they can pounce when the opportunity arises, whether that's a cash infusion to their portfolio or a sell-off in the stock market. As an investor who likes to earn income, I have several high-yielding stocks on my watchlist. Here are five that I'm watching right now:

Looking for more visibility into future growth

Tallgrass Energy currently backs its high-yielding payout with solid financial metrics. Overall, the company gets more than 95% of its earnings from predictable sources like fee-based contracts, covers its dividend with cash flow by a comfortable 1.18 times, and has a solid balance sheet backed by a conservative leverage ratio and ample liquidity. Those factors suggest Tallgrass Energy can continue paying out at its current rate.

However, what keeps the company on my watchlist is its uncertain growth potential since it only has $628 million of projects under construction at the moment. That could change because it's working on a needle-moving opportunity to build a new pipeline from Oklahoma to a proposed export terminal in Louisiana. If Tallgrass Energy can secure this project, then it could potentially offer investors a high yield and a high growth rate, which is why investors should put it on their radar.

Image source: Getty Images.

Watching for more diversification

Bakken shale-focused oil producer Oasis Petroleum created Oasis Midstream Partners last fall as a vehicle to build the midstream assets needed to support its growth in the region. Because of that, the partnership currently gets the bulk of its income from its parent. However, that's beginning to change as the company recently secured contracts with third-party producers to bolster its growth prospects. While Oasis Midstream currently estimates that the growth fueled by its parent and these other customers could drive 20% annual distribution increases through 2021, I'd like to see it continue securing third-party customers as well as diversify into another region -- such as the Permian where Oasis bought land last year -- before I'd consider buying.

Keeping a close eye on coverage

Targa Resources generated enough cash flow last year to cover its high-yielding payout by a razor-thin 1.0 times. As a result, the company has had to secure outside funding for the bulk of its growing backlog of expansion projects. The hope is that the earnings growth from these new additions -- which could double EBITDA in five years -- will provide Targa Resources' dividend with more breathing room, which is something investors should watch closely.

Looking for more outside expansion

Hess Midstream Partners shares a lot in common with Oasis Midstream in that it primarily operates in one basin (also the Bakken) and has one main customer (Hess). While the company has been securing additional third-party opportunities with customers, I'd like to see more diversification, such as making some third-party acquisitions or securing joint ventures to reduce the reliance on its parent to drive growth. However, with a more than 6% yield that Hess Midstream believes it can grow at a 15% annual pace for the next few years, it's an interesting income stock to watch.

Image source: Getty Images.

Waiting for a cheaper price

NextEra Energy Partners is a bit different from the other companies on this list in that it mainly operates wind and solar power-generating facilities, though it does own some natural gas pipelines. Currently, the company expects to grow its dividend at a 12% to 15% annual rate all the way through 2023, powered by acquisitions from its parent, organic expansions, and third-party acquisitions. However, investors are paying a premium price of more than 20 times cash flow for that renewable-powered growth, which is why NextEra Energy Partners' yield is much lower than the others on this list. That's why I think it's best that investors put this pricey high-yield stock on their watchlist until the valuation comes down into at least the mid-teens.

Intriguing yields, but...

All five companies offer investors above-average income streams. However, in each case, there's at least one issue that keeps their stocks on my watchlist: If these companies address those concerns, they will become much more compelling options for income investors like me to consider buying.

Matthew DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Author

Matthew is a Senior Energy and Materials Specialist with The Motley Fool. He graduated from the Liberty University with a degree in Biblical Studies and a Masters of Business Administration. You can follow him on Twitter for the latest news and analysis of the energy and materials industries: Follow @matthewdilallo